Retail Supplier Protests ISO-NE Credit Change Proposal as "Throwing Darts," Says Proposal Would "Balkanize" Credit Policy

ISO New England's proposal filed at FERC to revise its financial assurance and billing policies by changing the cure percentage for a Market Participant that receives one or more margin calls within a rolling 365-day period would, "balkanize credit policies and create an undue preference for one class of Market Participants," retail supplier Twin Cities Power, LLC said in a protest.

The revision to the cure percentage policy involves additional consequences for Market Participants that receive one or more notices of a financial assurance default (i.e. margin call) in a rolling 365-day period. Specifically, if a Market Participant receives notice that its credit test percentage exceeds 100% and that Market Participant has received one to five similar notices within the previous 365-day period (not including the most recent notice), under the proposed revision, the Market Participant must provide sufficient financial assurance to lower its credit test percentages to less than or equal to 90% by 8:30 a.m. Eastern time the next business day to avoid suspension. If a Market Participant has received six or more such notices within the previous 365-day period, it will be required to maintain sufficient financial assurance to keep its credit test percentages at less than or equal to 90% until it no longer has six or more such notices within the applicable 365-day period. Market Participants with no such notices in the applicable 365-day period are only required to maintain sufficient financial assurance to keep their credit test percentages at less than or equal to 100%.

ISO-NE has bundled this proposed cure percentage change with another credit revision, specifically, requiring that participants cure, by 8:30 a.m., any margin calls involving the Day-Ahead Energy Market. Twin Cities Power does not oppose this change in the deadline.

"But the proposal to link the cure percentage with margin calls is wrong and must be rejected because it (1) was not properly vetted by the stakeholders, (2) is unsupported by any evidence and instead based on pure conjecture; (3) is unrelated to the likelihood of future defaults, and (4) creates new and different classes of Market Participants for credit purposes," Twin Cities Power said.

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Twin Cities Power said that ISO-NE proposed the tariff revisions regarding the cure percentages for the first time at the March 27, 2013 Budget and Finance Committee meeting, with no prior vetting in the stakeholder process.

Twin Cities Power said that the cure percentage revisions are not needed to comply with a prior FERC order regarding the closing time of the Day-Ahead Market, and said that, "linking the cure percentage to the number of margin calls, is based on pure conjecture, relying solely on the unsupported testimony of an ISO-NE employee, Mr. Marc D. Montalvo, who surmises: '[B]ecause the change in timing for suspension under the Policies decreases the time that Market Participants will have to cure a financial assurance default or payment default, all other things being equal, the probability of suspension increases.'

"Neither the ISO-NE nor Mr. Montalvo provide any evidence suggesting that the number of margin calls received by a Market Participant is directly linked to (much less predict) a default," Twin Cities Power said. "Indeed, the proposal is purely arbitrary. There is no analysis explaining why the proposed frequency of margin calls (one to five) and time period (a rolling 365-day period) are appropriate. The ISO-NE is essentially 'throwing darts' to determine the outline of its proposal. Thus, even if the Commission were to accept the proposed revisions, it is doubtful that there would be fewer defaults in the market," Twin Cities Power said.

"ISO-NE's proposed tariff revisions seek to base credit requirements (margin and cure percentages) on past trading activity (margin calls) ignoring the fact that future voluntary activity can differ significantly from historical activity levels. Therefore the future trading activity for a company can potentially result in margin calls or defaults, when no previous margin calls have occurred," Twin Cities Power said.

"Ironically, the proposal (establishing different margin and cure percentages) would not necessarily prevent losses, but would ensure that companies with no margin calls would be likely to have less collateral on hand in the event of a default. The proposed language ensures that the market inherently has less protection from defaults from those companies with no previous margin calls," Twin Cities Power said.

"ISO-NE's tariff revisions are also unduly discriminatory in that they establish different margin and cure percentages for different groups of participants based on a factor that is not predictive of defaults. ISO-NE has provided no valid reason why the margin and cure percentages would be 100% for a party with no previous margin calls, but 90% for those with more. The proposal would balkanize credit policies and create an undue preference for one class of Market Participants. If ISO-NE desires to change a certain cure percentage, it should be the same percentage for all Market Participants," Twin Cities Power said.

Docket ER13-1257